8/10/2014

What We Mean When We Say Student Debt Is Bad

By: Susan Dynarski

Once again, the headlines are filled with claims that student loans are bad. Several articles have highlighted results from a Gallup poll that shows that college graduates who borrow for college are less happy, healthy and wealthy than debt-free graduates. The Gallup report (which is cautious in its interpretation of the data) has been drawn into a rising chorus of news media reports on the negative consequences of borrowing: Student loans not only make you sick but also hamper homeownership and delay marriage.

Student loans need reform. But recent reports obscure the key benefit of borrowing for college: a college education.

The highlight of the Gallup report is a comparison of the well-being of college graduates who did not borrow and those who borrowed more than $50,000. As I discussed in this New York Times article in June, 43 percent of undergraduates borrow nothing, and 98 percent borrow less than $50,000. The report is therefore comparing the 43 percent of undergraduates who borrow nothing with those with the highest debt loads.

Here is an uncontroversial proposition: If you take $50,000 away from a college graduate, she will be less happy. She could have used that $50,000 to make a down payment on a house, or buy a car, or to do the many other things that people do with their money.

I am happy to yield the point that, everything else held constant, a person will be happier without debt than with it. The key phrase here is “everything else constant.” I have a mortgage because I have a house. I would be less happy with no mortgage and no house.

Graduates with student debt used it to buy something valuable. To state the obvious, you can’t have student debt without having gone to college. Without a student loan, these borrowers may not have been able to get a degree at all. And that benefit is missing from this poll, which surveyed only college graduates. Their alternate-universe selves, who did not go to college because they had no loans to turn to, are not in the survey.

We can claim college education as a benefit of student loans only if student loans truly increase college education. Do they? There is little good evidence on this, none of it from the United States. The best evidence comes from South Africa and Chile.

In these countries, students are offered loans only if they have a minimum credit score (South Africa) or test score (Chile). The papers that analyze these loan programs compare the college attendance of students right above and below these cutoffs, capturing the causal impact of loan availability.

This research approach is referred to as “regression-discontinuity” (RD) design. RD analysis assumes that it’s random whether someone ends up right above or right below the cutoff. Of course, it’s not at all random that some students have very high test scores and others very low ones, and we’d expect more of those with high scores to go to college. That’s exactly what we see in the Chilean case, below: At the top of the score distribution, almost everyone goes to college. What RD analysis relies on for causal inference is the big, discontinuous jump in college attendance at the cutoff score that is required for a loan:

How Loan Availability Can Affect College EnrollmentIn Chile, there is a big jump in college attendance at the cutoff test score (PSU) that is required of a student to qualify for a loan.
This figure shows that right below the test-score cutoff, 20 percent of students went to college. Right above, it’s 40 percent. The difference — 20 percentage points — is the estimated causal effect of loan availability on college attendance.

The South African study reaches a similar conclusion. Right below the credit-score cutoff, 50 percent of students went to college, compared with 70 percent right above. Again, the estimated effect is a 20-percentage-point increase in college attendance.

These are enormous effects. The papers show that student loans make college possible for many students, at least in these two countries. The effect may be smaller in the United States, or it might be larger. I’d wager that student loans open the doors of college for millions of American students who could not otherwise attend.

If we want to know the benefits of offering loans (versus not offering them), we need to take this enrollment effect into account. The relevant question to ask is not: Would you be better off with another $50,000 in your bank account? Rather it’s: Would you be better off with no debt and no degree?

My guess: “No.” The payoff to college is enormous, and much larger than the typical student debt.

There are some students who would have gone to college even without a loan. They took one anyway so they could attend a more expensive college (or to work less). Are they worse off with loans than without? For these students the relevant question is: Would you be better off with no debt, having gone to a cheaper college?

Here, the answer is less clear. If the pricier college is much better at teaching and getting students to graduation, the debt could be worth it. If the pricier college is no better (or even worse), then the debt is not worth it. In the latter case, I have in mind students choosing between community colleges and for-profit colleges, which offer similar types of courses but differ vastly in price. The jury is still out on whether for-profit colleges are much worse than community colleges, but the evidence we have so far definitely doesn’t suggest that they are much better.

I will end with another uncontroversial proposition: Students would be happier, all things equal, if college were free. In the not-so-distant past, prices at public colleges, particularly at community colleges, were close to zero. Taxpayers made those low prices possible, with states using that tax revenue to keep prices low at their public colleges. Taxpayers and states have cut back on their support for public colleges, and students now pay a higher share of their college costs than they once did. They’re not happy about it.